Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 13, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Grenada.1

Early in the morning of July 14, just hours after the Article IV staff report was discussed by the Executive Board, Grenada was struck by Hurricane Emily. The hurricane caused loss of life, injury and significant damage to a country still recovering from the impact of Hurricane Ivan, which hit the country in September 2004. Managing Director Rodrigo de Rato has written to Grenada's Prime Minister Mitchell, conveying the Fund's sympathies and assuring him of its readiness to help the people of Grenada in the difficult task of reconstruction and recovery that lies ahead.

Background

Grenada's economy has been highly susceptible to changes in global economic conditions, particularly growth in advanced economies, and to natural disasters. Macroeconomic conditions have been difficult in Grenada since 2001 as a result of adverse shocks—the decline in tourism in the aftermath of the September 2001 terrorist attacks and the damage caused by Tropical Storm Lili and Hurricane Ivan. Real GDP growth, on average, has been low over the last five years compared with growth of nearly 6 percent a year in the late-1990s.

The absence of sustained growth has added to fiscal and debt imbalances. Although fiscal policy was expansionary in the mid-1990s, the public debt-to-GDP ratio remained broadly stable at around 50 percent of GDP, as deficits were financed partly by privatization proceeds. However, public debt spiraled to 110 percent of GDP by end-2003, as privatization receipts declined, guarantees were granted, and leases associated with public-private partnerships were purchased. As the economy began to recover in 2003, the government began to consolidate its fiscal accounts. Nevertheless, debt remained very high and the associated interest burden continued to rise.

Economic conditions and policy priorities changed abruptly when Hurricane Ivan hit in September 2004. Damage from the hurricane exceeded 200 percent of GDP. The economy contracted by 3 percent in 2004, a sharp reversal from the 4 percent growth that had been projected for the year pre-Ivan. Progress in fiscal consolidation was impeded as the authorities gave priority to post-hurricane relief and rehabilitation and revenue collection stalled. Nonessential expenditures were curtailed, and donor pledges of US$150 million (34 percent of 2004 GDP) were marshaled quickly through donor conferences. Grenada also received US$4.4 million (25 percent of quota) under the Fund's emergency assistance policy for natural disasters in November 2004.

A month after Hurricane Ivan struck, the authorities announced public debt to be unsustainable. In October 2004, they announced their intent to seek a cooperative solution with their creditors and donors. Interest payments were missed in December 2004 on two large international bonds pending their orderly restructuring. Grenada was downgraded to `selective default' by Standard & Poor's. In January 2005, Grenada hired legal and financial advisors to assist in the formulation of a comprehensive debt-reduction strategy.

Inflation has remained low and stable within the framework of the currency board arrangement. The inflation rate has averaged 2 percent over the past 15 years. The annual inflation rate in April 2005 was 1.8 percent.

External current account deficits have been large, although mostly financed by foreign direct investment and capital transfers. Having averaged around 20 percent of GDP in 1997-2000, the current account deficit increased further to 32.7 percent by 2003. In 2001-03, more than half of the current account deficits were financed by foreign direct investment, and nearly one third by capital transfers, including migrant capital transfers.

Financial sector indicators have strengthened in recent years. Enforcement of regulations governing the offshore sector improved, leading to Grenada's removal from the Financial Action Task Force list of noncooperative countries in February 2003. Prudential indicators of the domestic banking sector have generally compared favorably with Eastern Caribbean Currency Union (ECCU) averages, with the ratio of nonperforming loans to total loans being the lowest in the region at 4½ percent at end-2003. After Ivan struck, banks granted moratoria on loans, sharply increased loan loss provisions, and assessed loan-by-loan credit quality. The share of nonperforming loans in the total rose to 5.8 percent at end-March 2005.

Executive Board Assessment

Executive Directors commended the people and government of Grenada for their efforts to overcome the effects of the massive damage caused by Hurricane Ivan. They praised the authorities' actions to maintain fiscal discipline in 2004 while outlining an agenda for reconstruction and reform under these daunting circumstances. Despite these efforts, the situation remains challenging. Directors noted that the economy contracted by 3 percent last year and is expected to recover only slowly over the course of this year. The external current account deficit is expected to deteriorate, the government faces large financing gaps, and the public debt stock stands at a very high level.

Directors welcomed the close cooperation between the authorities and the Fund staff to help Grenada overcome these problems. They expressed strong support for the authorities' intent to adopt a comprehensive medium-term plan to fill financing gaps and reduce and restructure public debt, with a view to restoring debt sustainability and boosting growth. Directors were encouraged by the authorities' progress with their home-grown structural adjustment program. They noted that in the absence of an official financing package, a sharp fiscal adjustment would be needed in order to restore external viability.

Directors agreed that filling financing gaps requires the collective effort of all stakeholders—creditors, donors, and the Grenadian people themselves. In this context, they commended the government for the measures proposed in the 2005 budget and urged their early implementation to address fiscal imbalances. They noted that an increase in retail fuel prices was scheduled for later this year and encouraged the adoption of social safety nets to protect groups most vulnerable to the effects of this increase. Directors welcomed the authorities' intent to continue to work closely with the staff on the design of a mechanism for regular changes in retail fuel prices in line with world prices. They hoped that the public consultations conducted by the government in recent weeks would result in the adoption of a special levy on incomes that has broad support.

Most Directors noted, however, that further fiscal effort would be required beyond the measures announced in the 2005 budget. Efforts should be made on the revenue side to reduce tax concessions and strengthen tax audits and collection. On the expenditure side, Directors urged wage moderation—following the cumulative increase of 40 percent in the public sector wage bill over the last five years. They advised that public sector wage increases should be aligned with productivity growth. Directors also drew attention to the importance of carefully prioritizing capital expenditures. They supported the authorities' requests for technical assistance to catalyze their efforts.

Directors were encouraged by the generous donor pledges that Grenada received in the aftermath of Hurricane Ivan, but noted that continued efforts were necessary to ensure the full disbursement of pledged funds.

Directors welcomed the progress that the authorities have made in their discussions with commercial creditors. They looked forward to the launch and successful completion of a debt exchange offer. Directors urged the authorities to continue their dialogue with official creditors and to respect the principle of inter-creditor equity. Several Directors saw an important role for the Fund in assisting Grenada to move to a position of debt sustainability, including by facilitating the process of restructuring the country's Paris Club debt. The need to engage the non-Paris Club creditors was also underscored.

Directors noted the important role that the Agency for Reconstruction and Development will be required to play in bringing about Grenada's economic recovery. They strongly urged that the mechanisms to ensure transparency and accountability in the use of donor funds be made fully operational. In particular, the operations of the Reconstruction and Development Fund and the Agency's own operational expenses should be recorded transparently as an item in the budget. The importance of setting clear priorities and enhancing implementation and capacity building in carrying forward the reconstruction process was also noted.

Looking beyond the near-term recovery of the economy, Directors urged that the government's economic program should include structural measures to improve the investment climate and increase the contribution of the services sector to growth. Directors welcomed the authorities' recognition of, and willingness to promote, greater regional integration as a way of boosting medium-term growth prospects.

Directors noted that Grenada's high vulnerability to natural disasters highlights the urgent need for strengthening its ability to prepare for and cope with these shocks. They accordingly welcomed efforts to boost disaster mitigation and preparedness, particularly through better enforcement of building codes. They welcomed the authorities' openness to looking into ways to transfer disaster risk, including through regional insurance pools.

Directors stressed the importance of close monitoring of the health of the financial sector. They urged the authorities to ensure, in conjunction with the Eastern Caribbean Central Bank (ECCB), that there is effective supervision of the banking sector, including through onsite inspections. They welcomed the authorities' efforts to improve the legislative framework for financial system regulation and supervision and their intention to strengthen regulation of the insurance industry.

Directors encouraged the authorities to strengthen the quality, coverage, timeliness, and frequency of the statistical database to facilitate policymaking and effective surveillance. They welcomed the recent efforts to improve data on poverty, which should help in the design of effective social safety nets.

Grenada: Selected Economic Indicators, 2000-05

Est.

Proj.

2000

2001

2002

2003

2004

2005

(Annual percentage change, unless otherwise specified)

Output and prices

Real GDP

7.0

-4.4

0.8

5.8

-3.0

0.9

Consumer prices, end of period

3.4

2.5

2.3

1.6

2.5

3.0

Consumer prices, period average

2.1

1.7

1.1

2.2

2.3

3.0

Banking system

Net foreign assets 1/

0.3

7.4

10.8

5.8

17.9

2.1

Net domestic assets 1/

15.0

3.2

-3.7

2.2

-0.2

0.2

Of which:

Net credit to the public sector 1/

3.6

4.9

-4.5

2.3

-6.5

0.1

Credit to private sector 1/

12.9

0.8

0.9

3.1

5.0

1.9

Broad money

15.4

10.6

7.1

8.0

17.7

2.3

Average deposit interest rate (in percent per annum) 2/

4.2

4.2

3.2

3.4

2.8

...

Average lending interest rate (in percent per annum) 2/

11.5

10.1

10.5

12.4

10.0

...

(In percent of GDP, unless otherwise specified)

Central government finances

Total revenue and grants

29.8

31.0

29.0

34.5

33.1

41.7

Of which:

Grants

2.9

4.2

2.1

6.9

7.5

13.9

Total expenditure 3/

33.0

39.5

48.2

39.3

35.9

50.2

Current expenditure

20.8

24.2

25.9

24.3

27.9

31.0

Capital expenditure 3/

12.2

15.3

22.2

15.0

7.9

19.2

Current balance

6.0

2.5

0.6

3.2

-2.4

-3.2

Primary balance (after grants) 3/

-1.0

-5.8

-14.5

0.4

3.7

-2.5

Overall balance (after grants) 3/

-3.2

-8.5

-19.2

-4.8

-2.8

-8.5

Financing gap

0.0

0.0

0.0

0.0

0.0

4.6

Total public sector debt 4/

56.2

63.7

109.6

110.0

129.4

133.1

External sector

External current account

-21.5

-26.6

-32.0

-32.7

-17.4

-33.9

Exports, f.o.b. (percentage change)

11.7

-23.3

-34.9

10.0

-23.1

-13.2

Imports, c.i.f. (percentage change)

19.7

-10.9

-7.8

25.1

4.1

17.5

Travel (net, percentage change)

4.8

-10.7

7.2

17.2

-12.4

-8.5

Terms of trade (- = deterioration, percentage change)

-5.4

0.4

-1.6

-3.1

-11.6

3.0

Real effective exchange rate

(- = depreciation, percentage change)

5.7

-0.1

-3.4

-8.5

-4.6

...

External public sector debt 4/

35.1

45.5

83.6

80.2

95.0

100.4

Sources: Ministry of Finance; Eastern Caribbean Central Bank; and IMF staff estimates and projections.
1/ Annual changes relative to the stock of broad money at the beginning of the period.
2/ Break in the data series in 2003.
3/ Includes 11.4 percent of GDP paid in 2002 to extinguish lease arrangements, and reflected in capital expenditures.
4/ Includes central government debt, government-guaranteed debt, and non-guaranteed public enterprise debt.1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.